facebook libra

The promise of cryptocurrencies is that we can create a
widely-acceptable medium of exchange without having to trust anyone. Cryptocurrencies have no central authority,
no government agency to vouch for them. We don’t need to trust a government or
a bank or a stock exchange. Elites can’t cheapen our currency because no elites
are involved. Indeed, no one is involved. The currency is distributed across
multiple computers and multiple networks. To manipulate the currency, one would
need to control all the computers in the world – a seemingly impossible task.

In the original conception, the value of a cryptocurrency is
based on nothing more than supply-and demand. Value is not linked to any
physical asset like gold or oil or even paper currencies like dollars. Since
there is no asset behind the currency, no one can manipulate the value of the
currency by manipulating the underlying asset. Rather than trusting a
government or an agency or a bank, we place our trust in an algorithm
distributed around the world.

(The distributed nature of cryptocurrencies also makes them
quite slow. Speeding up transactions is a major challenge for blockchain
researchers. The most promising solution seems to be “sharding” – a technology
worth keeping an eye on.)

Traditionally, we’ve trusted governments to create and maintain the value of national currencies. That’s been a pretty good bet in the United States, less so in Venezuela. But, really, do we need a nation to create a widely acceptable currency? Cryptocurrencies suggest that the answer is “no”.

But there’s a not-so-subtle problem with cryptocurrencies.
The elephant in the room is that many people (myself included) view
cryptocurrencies as a new version of the Wild West – a territory populated by
libertarians, wild-eyed visionaries, snake oil salesmen, drug dealers, scam
artists, and terrorists. And, by the way, some person created the algorithm and
could potentially manipulate it for illicit purposes. Simply put, the current
cryptocurrency scene does not inspire trust.

To fill the trust gap, several “trusted” agencies have stepped forward to offer cryptocurrencies based on a trusted brand and/or on physical assets. Case in point: J.P. Morgan Chase’s “JPM Coin”. Announced earlier this year, (click here, here, and here) JPM Coin is backed by a major bank and based on a physical asset: the U.S. dollar. The company touts JPM Coin as a simpler, faster way to make and clear payments.

This past week, of course, another “trusted” organization – Facebook – announced that it will introduce a new digital currency called Libra next year. (Click here and here). Facebook wraps its announcement in humanitarian gauze – it’s simply providing an effective payment service to the world’s unbanked citizens. As Evgeny Morozov points out, however, Facebook is actually doing two things:

Preparing to take on China’s social media
giants, Tencent and Alibaba, which already combine payments and communications.

Positioning itself as a “as a rebel force
against mediocre bureaucrats and sluggish corporate incumbents”. It’s doing
battle against a coalition of lazy, inept, corrupt – untrustworthy – bankers, bureaucrats,
and politicians. Morozov suggests that Facebook is activating its populist
supporters to keep regulators at bay. More broadly, it’s a “plan to break the global
financial system.”

Could Facebook’s Libra actually become a global currency at the expense of the dollar, yen Euro, and renminbi? Facebook currently has 2.38 billion active users. That number makes even China’s population look small. If a significant portion choose the Libra over existing currencies, then the money we know today could become irrelevant. If a nation’s currency is irrelevant, how relevant is the government?

Given all this, here’s a basic question — whom do you trust
more: 1) the American government; or 2) Facebook?

(Note that JPM Coin and Libra are not truly cryptocurrencies, at least not in the original sense of the word. A cryptocurrency has three elements: 1) No central authority, agency, governing body or processor. Clearly J.P. Morgan and Facebook are centralized governing bodies. 2) No physical assets backing the currency. JPM Coin, uses the U.S dollar as its backing asset – it’s a digital currency based on a fiat currency. Facebook says that Libra will be based on physical assets, though it hasn’t quite defined them. 3) Permissionless – you don’t have to ask anyone’s permission to use a cryptocurrency. To use JPM Coin, you need to have an account at J.P. Morgan. To use Libra, you’ll need a Facebook account. Given this, it’s probably best to call JPM Coin and Libra “digital currencies” as opposed to “cryptocurrencies”.)